Federal Housing Authority and Freddie Mac: Betting against the homeowner

This should be a big story but in all likelihood it won’t be. But it gives you an insight to the depth of intrusion into the housing market by the federal government. Don’t forget, the official story is that the housing problem it is all the fault of big banks. Read this story carefully, because there is much here that should help explain why that just isn’t so:

Freddie’s charter calls for the company to make home loans more accessible. Its chief executive, Charles Haldeman Jr., recently told Congress that his company is “helping financially strapped families reduce their mortgage costs through refinancing their mortgages.”

And:

Freddie Mac, along with its cousin Fannie Mae, was bailed out in 2008 and is now owned by taxpayers. The companies play a pivotal role in the mortgage business because they insure most home loans in the United States, making banks likelier to lend. The companies’ rules determine whether homeowners can get loans and on what terms.

The dirty little secret is they were always “owned” by the taxpayer. They were government subsidized entities (called “quasi-governmental”) whose policy was set by the federal government.

So who is in charge of Freddie Mac?

The Federal Housing Finance Agency effectively serves as Freddie’s board of directors and is ultimately responsible for Freddie’s decisions. It is run by acting director Edward DeMarco, who cannot be fired by the president except in extraordinary circumstances.

So let’s see, we now have a guaranteer of mortgages fully run by government (government can’t hide behind the “quasi” label anymore) and run by an essentially unaccountable bureaucrat is responsible for setting the “rules” which “determine whether homeowners can get loans and on what terms”. Yeah, no intrusion there.

Wonderful so far, yes?

So what’s our friendly little government institution that its CEO says is “helping financially strapped families reduce their mortgage costs through refinancing” been up too lately?

Betting against the success of its “charter”.

But the trades, uncovered for the first time in an investigation by ProPublica and NPR, give Freddie a powerful incentive to do the opposite, highlighting a conflict of interest at the heart of the company. In addition to being an instrument of government policy dedicated to making home loans more accessible, Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance.

Note that one phrase in the second sentence before we move on: “In addition to being an instrument of government policy dedicated to making home loans more accessible …”. That’s something that left continually denies, but, in fact, led to the type borrowing that brought the housing market down. Both Freddie and Fannie have been “instruments of government policy” since their establishment. Anyone who continues to deny that is simply denying reality.

Moving on, however, you see an inherent conflict of interest which all the experts are trying to waive away as something “walled off” from the side which makes the lending rules for mortgages. No conflict they say (one has to wonder what government would say if the same conditions existed in a private concern).

But (there are lots of “buts” in this story), here’s the rub:

The trades raise questions about the FHFA’s oversight of Fannie and Freddie. But the FHFA is not just a regulator. With the two companies in government conservatorship, the FHFA now plays the role of their board of directors and shareholders, responsible for the companies’ major decisions.

Under acting director DeMarco, the FHFA has emphasized that its main goal is to limit taxpayer losses by managing the two companies’ giant investment portfolios to make profits. To cover their previous losses and ongoing operations, Fannie and Freddie already had received $169 billion from taxpayers through the third quarter of last year.

The FHFA has frustrated the administration because the agency has made preserving the value of the companies’ investment portfolios a priority over helping homeowners in expensive mortgages.

No conflict though. The rule maker is also prioritized profit over refinancing. Again, wondering about the private side of things, does anyone doubt that a private concern would be in the government’s crosshairs if the same things were as obvious there?

It’s a bit like state lotteries. If you start a numbers game, you go to jail. The state reserves only to itself the right to run numbers games. In this case, what would have the FBI raiding the place and grabbing computers if it was a private company is simply a “debate” within the government on whether or not there’s any problem here.

Even though Freddie is a ward of the state, top executives are highly compensated. Peter Federico, who’s in charge of the company’s investment portfolio, made $2.5 million in 2010, and he had target compensation of $2.6 million for last year, when most of these leveraged investments were made.

One of Federico’s responsibilities — tied to his bonuses — is to “support and provide liquidity and stability in the mortgage market,” according to Freddie’s annual filing with the Securities and Exchange Commission. Mortgage experts contend that the inverse floater trades don’t further that goal.

Sometimes it makes you wonder who serves whom, doesn’t it? I look at stories like this and tend to wonder if, in fact, we’ve finally transitioned from a government of the people to one that can best be likened to the mafia. As this story points out, the intrusion is to such a depth now that government priorities no longer reside on the side of serving the people, but instead on serving government and its bureaucracies.

I agree with this analysis in general, making this entities “for profit” quasi-private institutions created a huge problem, especially when they were allowed to use their ostensibly public funds to lobby the government for rules to make them more profitable. Where I disagree is the notion that these entities were remotely related to the sub-prime catastrophe. I could explain how few sub-prime mortgages FNMA and FHLMC bought or originated, or how 90% of sub-primes were private markets originated and private market securitized. I could even mentions how 94% of sub-prime loans were made by institutions who were not regulated under the Community Reinvestment Act. I could even mention how FNMA and FHLMC went from originating $2.7T in loans to $1T because the private sub-prime scam loans were pulling in most of the new mortgage customers. I could mention all this, but you know it already because the official version is the accurate version. But again, there are still huge problems with the way these entities operate, some probably criminal, they are victims of the sub-prime crisis, but perpetrators of other misdeeds.

@Ragspierre As soon as I see every assertion you have ever made sourced, and after then, when I think your are educable. Or, better yet, why don’t you look up each assertion and attempt to find out for yourself. You shouldn’t even consider accepting a single source, I didn’t as a I researched the subject.

@looker Looker, the horses (your metaphor) got out when there was an uptick in interest rates and the sub-prime ARM’s began to do what they were always destined to do, FAIL. The shortest explanation I can provide is that private lenders, who were not covered under CRA, figured out two things, they could offer mortgages they would not want to own because they could sell them in the PRIVATE market, and second, they figured that anyone who could not afford their ARM rates could always sell for a profit, and the real estate market would never do anything but go up. They just did not calculate a major real estate selloff or a liquidity crisis into their risk assessment software. The banks opened the barn doors and FNMA and FHLMC were just hit by the stampede.

@CaptinSarcastic It’s not my contention that Fannie and Freddie were solely responsible for the great CF of 2008. No, their buddies in the banking industry and the wine and cheesers latched onto the plan wholeheartedly. My point was, “remotely” responsible? not hardly.

And then we had this cool government plan to ‘encourage’ banks to give people loans, for properties they couldn’t HOPE to pay for. And they figured it would only go up. Excuse me, I call bullshit, OR we need to kick every motherloving professor of economics and finance in every college across the country into the mid-Atlantic trench for passing students who thought the market could go nowhere but UP. Only a 10 year old would believe that was possible.
Remember, you’re telling me that the best and brightest from our education system, who run finance and handle the money, thought the market couldn’t go DOWN.

Oh, please. They’re flucking liars, they knew it could go down, they didn’t CARE. And now we’re allowing them to pretend they didn’t know and it was all a big surprise.

@looker No, really, I swear, Fannie and Freddie did not invent, suggest, or encourage sub-prime mortgages. This was entirely a creation of the private financial markets, and more important, to loons who think the Community Reinvestment Act had a role in this, 94% of the sub-prime mortgages were originated by institutions who were not covered by the CRA. At one point, Fannie and Freddie were originating or guaranteeing most new mortgages, but the sub-prime market eclipsed them. I am not saying that the individuals were literally unaware the markets could go down, what I am saying is that the parameters built into the risk assessment software did not take the full extent of these variables into account. A number of people saw the writing on the wall, but Wall Street trusted their risk assessment software more than common sense. You know as well as I do that Goldman figured all of this out ahead of the market when they made a nice profit short selling the sub-prime market, but they did not advertise what they knew, they profited from it. (making a profit is their job so that is not a knock, there were plenty of people publiclly sounding the alarm), but these guru’s were fooled by their own cleverness in that they got S&P and Moody’s to give these instruments AAA ratings, and then felt safe since they had AAA ratings.

@CaptinSarcastic “Mr. Peabody here, I’ve had my boy Sherman (say hello to the nice people Sherman…’Hello”) dial the Wayback Machine to the year 2008, July, to be specific. Where we’ll get a chance to view ‘at the time’ information relative to Fat Fannie and Dirty Freddie, those government sponsored gangsters of the 21st century housing market….

What do Fannie and Freddie DO?
“Fannie Mae and Freddie Mac bundle the loans they buy into securities, which are sold, with a guarantee of payment, to investors worldwide. The two companies also guarantee mortgages and pay owners of the loans when there is a default.”

“Including investments and guarantees, Fannie Mae’s total book of business topped $3 trillion for the first time in May, twice its size at the beginning of 2002.
With Freddie Mac’s $2.2 trillion in investments and guarantees, the two have a hand in nearly half of the entire U.S. mortgage market.”

@looker Please, please, look this up, I think it will clear up a lot for you. The they owned or guaranteed $1.4 trillion, or 40%, of all U.S. mortgages. They only held $168 billion in subprime mortgages. The sub-prime crisis spawned the real estate crisis that laid waste to even prime 80/20 mortgages that these institutions held. They did NOT own 50% of sub-prime, they were barely in that market, but owning ANY mortgages after the sub-prime crisis became problematic. The worst decisions actually happened in March of 2008, when the two GSE’s used a taxpayer capital infusion to buy $300B more in sub-prime mortgages. And while this was a terrible decision, the crisis was already underway without any help from them, they just misjudged and thought they were buying low.

Since the price of all houses has fallen, your claim is that it was sub-prime that mainly drove prices up. This is debatable big time. Low interest rates helped prices along just fine, without sub prime.

And strong foreign demand for MBS created huge incentive to find dog doo to package up for German pension funds. Everyone was seeking yield.

Finally, in every bubble, there is a final stage of the last gaps of leverage – were sub-prime really that popular during the run up, or was the final symptom that let everyone see the disease? I am just not sure I can buy a story where a few sub prime buyers in LA caused housing there to become insanely high. But I can buy a story where low interest rates and lack of other investment opportunities made people pile into real estate.

Keep in mind many of the forcelosures aren’t even sub-prime but people who took out 2nd and 3rd mortgages. Or who refinanced a home they owned free and clear.

My analogy is that we have a huge pool of gasoline, and sup prime may have been one of several sparks that occurred. To decide that the spark was dangerous and not the pool of gasoline is problematic, even though the spark was important.

And your theory, that sub prime drove the entire healthy market down, means that if the Fed bought up all the sub prime stuff…and hey, they did that, then the market should quickly recover to pre-crisis levels, no?

@Harun @looker Okay, this is a new point, that low interest rates alone would have created a bubble unrelated to sub-prime loans. I agree it is debateable, since we cannot know what would have happened without the sub-prime crisis. I will suggest that interest rates are relevant, but FAR less relevant than liquidity or ease of credit. We have very low interest rates now, but it is very hard to get a loan. I submit that conventional prime loans had much higher standards, and therefore did not add much liquidity, so even if housing were inflated, the impact would have been much less dramatic. It was the extension of credit to a much larger pool of buyers by the private markets using sub-prime that turned what should have a normal cyclical correction into a global economic catastrophe.

@Harun But the Fed didn’t buy the sub-prime market up, they just handed cash to the banks to bring their asset ratios out of the red. Those sub-primes are still out there, and least the ones people have not walked away from or had foreclosed. The GSE lost a full 14% of market share in the run up to the crisis, so I really can’t buy an argument that says they were responsible for driving UP prices. The forces that took their market share were responsible, and those forces were the private sub-prime (and second and third) mortgage markets.

@looker @Harun That is the CRA argument Looker, and it falls flat. The CRA has been around for decades, and yes, it had been tweaked, but there are two main points that kill the “CRA caused the crisis” argument. 1. CRA only covers very specific financial institutions and these CRA covered institutions made only 6% of the sub-prime loans, so there is no way to argue that CRA pushed institutions to make sub-prime loans. 94% of sub-prime loans were made by institutions that had no requirements under CRA at all. they made the loans for different reasons (profit). 2. CRA requirements were for fixed fixed-rate loans, with no prepayment penalties, and were made through banks. What was the defining characteristic of the sub-prime loans, besides the credit worthiness of the buyers? It was the ARMs with a short term teaser rate followed followed automatic, and indexed, rate increases. The CRA had nothing to do with this.

@CaptinSarcastic @Harun “CRA only covers very specific financial institutions ”
if by that you mean banking institutions in cities where ‘the poor’ were seeking mortgages….it covered commercial banks and S&L’s. That’s a pretty broad specific. Unless they never wanted to merge, or branch, they were wise to comply.

@looker @Harun CRA regulations only applied to federally insured banks. The regulations did NOT apply to credit unions, independent mortgage companies, or investment banks, and these non-CRA regulated entities made 94% of sub-prime loans. The sentence you quoted did not exist in a vacuum, I explained this in the previous post.

“I look at stories like this and tend to wonder if, in fact, we’ve finally transitioned from a government of the people to one that can best be likened to the mafia.”

Why do you wonder? It is the very nature of government to tend toward tyranny. You can’t plant an apple seed and expect to grow a pear tree. Unless, of course, you’re a certain President or a clueless Professor in Maine.

@Ragspierre Carney makes an awful argument that CRA relaxed lending standards and it made plain to see when you realize that at the height of the crisis, only 6% of sub-prime loans were made by institutions covered by the CRA. 6% doesn’t lead the market, 94% leads the market. The sub-prime crisis was NEVER about getting poor people into houses, it was about getting ANYONE into mortgages because they figured out how to secutize crap and make it look like gold. Getting a AAA rating on a pile of dog crap was a massively profitable enterprise for the private investment houses, and THAT is why they did it.

His [Frank’s] most successful effort was to impose what were called “affordable housing” requirements on Fannie Mae and Freddie Mac in 1992. Before that time, these two government sponsored enterprises (GSEs) had been required to buy only mortgages that institutional investors would buy–in other words, prime mortgages–but Frank and others thought these standards made it too difficult for low income borrowers to buy homes. The affordable housing law required Fannie and Freddie to meet government quotas when they bought loans from banks and other mortgage originators.

At first, this quota was 30%; that is, of all the loans they bought, 30% had to be made to people at or below the median income in their communities. HUD, however, was given authority to administer these quotas, and between 1992 and 2007, the quotas were raised from 30% to 50% under Clinton in 2000 and to 55% under Bush in 2007. Despite Frank’s effort to make this seem like a partisan issue, it isn’t. The Bush administration was just as guilty of this error as the Clinton administration. And Frank is right to say that he eventually saw his error and corrected it when he got the power to do so in 2007, but by then it was too late.

It is certainly possible to find prime mortgages among borrowers below the median income, but when half or more of the mortgages the GSEs bought had to be made to people below that income level, it was inevitable that underwriting standards had to decline. And they did. By 2000, Fannie was offering no-downpayment loans. By 2002, Fannie and Freddie had bought well over $1 trillion of subprime and other low quality loans. Fannie and Freddie were by far the largest part of this effort, but the FHA, Federal Home Loan Banks, Veterans Administration and other agencies–all under congressional and HUD pressure–followed suit.
snip
Even he has admitted it. In an interview on Larry Kudlow’s show in August 2010, he said “I hope by next year we’ll have abolished Fannie and Freddie … it was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.”
snip
Once again, Frank makes assertions without numbers. Of the 19.2 million subprime and low quality loans that were on the books of government agencies in 2008, 12 million (about 62%) were held or guaranteed by Fannie and Freddie. No one who has grasped the significance of these numbers–and there is much more data in my dissent–could believe that Fannie and Freddie were “not a major factor.” It was the unprecedented number of delinquencies and defaults among these mortgages, as I noted above, that drove down housing prices all over the country and caused the financial crisis. The data and my analysis led me to a conclusion that is exactly the opposite of Congressman Frank’s: if it hadn’t been for the government’s housing policy, there would not have been a financial crisis.

@Ragspierre This whole opinion piece, by a AEP crony is LOADED with lies. For example, in this story, where the term “sub-prime” is used, a new definition of sub-prime is created by Wallison that is accepted nowhere else in the financial community and specifically not by the body they quoted as defining a subprime borrowing, the Comptroller of Currency http://www.fdic.gov/about/comein/background.html . They are using “sub-prime” to describe ANY loan made to a person with less than a 660 credit score when that is just one variable of the definition and a great manay people with credit scores below 660 were able to get prime loans because they did have the several other defining characteristics of sub-prime borrowers. Using a liar for a source doesn’t make it less of a lie.

@Ragspierre Raggy, when are you going to figure this out, sources don’t matter, they are ALL suspect. This is about discussion and debate and education. Much of what I say is from memory, and I could be wrong occasionally. If you see something that doesn’t sound right, check it out. If it’s right, you learned something, if it is not right, you learned something. If you post crap like your opinion piece from Wallison as a source, you may as well consider ME as the source of ALL that I say. But I’ll do this for you one time, but from then on, your education is on you. Read page 451 of Wallison’s dissent to the findings of the Inquiry Commission findings: “However, a FICO credit score of less than 660 is generally regarded as a subprime loan, no matter how originated. That is the standard, for example, used by the Office of the Comptroller of the Currency.” Here’s the link to the report http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_wallison_dissent.pdf So how does the Office of the Comptroller of Currency actually define a sub-prime borrower? “Generally, subprime borrowers will display a range of credit risk characteristics that may include one or more of the following:

•Two or more 30-day delinquencies in the last 12 months, or one or more 60-day delinquencies in the last 24 months;
•Judgment, foreclosure, repossession, or charge-off in the prior 24 months;
•Bankruptcy in the last 5 years;
•Relatively high default probability as evidenced by, for example, a credit bureau risk score (FICO) of 660 or below (depending on the product/collateral), or other bureau or proprietary scores with an equivalent default probability likelihood; and/or
•Debt service-to-income ratio of 50% or greater, or otherwise limited ability to cover family living expenses after deducting total monthly debt-service requirements from monthly income.
This list is illustrative rather than exhaustive and is not meant to define specific parameters for all subprime borrowers. Additionally, this definition may not match all market or institution specific subprime definitions, but should be viewed as a starting point from which the Agencies will expand examination efforts.” http://www.fdic.gov/about/comein/background.html
The key to understanding the lie is that Wallison’s crony ignored the reported sub-prime loans and redefined half of all GSE loans as sub-prime based on specious reasoning. This deception is evident when you look at the actual experience of the loans Wallisons defined as sub-prime compared to actual sub-prime mortgages. GSE loans that wallison self-defined as Sub-prime had serious delinquency rates of 1/4 the delinquency rates of subprime loans, by the actual definition, and 1/3 the delinquency rate of traditionally defined Alt-A loans. The loans 50% of ALL GSE loans that Wallison self-defined as subprimehad a serious delinquency rate that was below the 6.3% national average of all mortgages at the time. In other words, the GSE’s said they were not sub-prime, they did not perform as sub-prime, but Wallison lied and called them sub-prime to make his argument that the GSE’s were originating half sub-prime loans. I don’t expect you to be able process this, which is why I don’t and won’t take the time to do this in the future, but there it is, Wallison lied and called half of all GSE loans sub-prime when they were not.

@CaptinSarcastic By 2000, Fannie was offering no-downpayment loans. By 2002, Fannie and Freddie had bought well over $1 trillion of subprime and other low quality loans. Fannie and Freddie were by far the largest part of this effort, but the FHA, Federal Home Loan Banks, Veterans Administration and other agencies–all under congressional and HUD pressure–followed suit.

True or false.

“I hope by next year we’ll have abolished Fannie and Freddie … it was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.”–Bwany Fwank

True or false

Of the 19.2 million subprime and low quality loans that were on the books of government agencies in 2008, 12 million (about 62%) were held or guaranteed by Fannie and Freddie. No one who has grasped the significance of these numbers–and there is much more data in my dissent–could believe that Fannie and Freddie were “not a major factor.” It was the unprecedented number of delinquencies and defaults among these mortgages, as I noted above, that drove down housing prices all over the country and caused the financial crisis.

“subprime and low quality loans”

You are lying about what Wallison said. He used the terms “subprime and LOW QUALITY”.

One of his points is that the disaster was triggered by DEFAULT and delinquency of HUGE numbers of loans.

Do you assert there were NOT huge numbers of DEFAULTS and delinquencies? (Percentages really don’t matter, do they?)

@timactual @Ragspierre I think in the end, sources can matter in matters of fact. But my point is that this is not a closed system, we ALL have access to the same resources and they are fairly unlimited. Anything anyone says I can search as easily as clicking a link to their source, and I prefer this because while I MAY find their source, also find other sources. I never consider ANYONE’s op-ed to be a credible source, whether it I agree with the conclusions or not. I might start with an opinion piece, and then track the facts back to the sources and decide if those sources are credible. But after playing this game for 15 years, I have concluded that the cry for “sources” is a red herring. If I disagree with what someone says, I’ll say so and why. It is up to the reader to decide who is right and who is wrong, and how far they want to go to make this determination.

@Ragspierre Raggy, the loans you are describing as sub-prime (or low quality) performed BETTER than the national conventional mortgage market. Why is this so hard for you to understand? Wallison used any SINGLE characteristic of a sub-prime or Alt-A loan to call it a sub-prime (or low quality) loan. This is counter to reality, a lie. If you have a low credit score, but make a large down payment, I can expect good performance, and I’d be right. If you have great credit, but no down payment, I can expect good performance, and I’d be right. The actual sub-prime loans originated in the private sector would be low credit, low LTV, no income verification, ALL AT ONCE, and those are the mortgages that brought down the market, and the effect of those reverberated through the ENTIRE mortgage market, including conventional mortgages, but the loans Wallison defined as sub-prime (or low quality) STILL performed as well as the conventional loans which tells me that the GSE were correct not to define them as sub-prime (or low quality), It is a big fat lie to characterize half of all GSE loans as sub-prime or low quality.

@Ragspierre The fact that you posted an opinion piece as your source supports my point. When I write an opinion, it is an opinion piece, treat it as you would any opinion piece I might link to. I never lied about anything related to Keystone and I showed that then. Your obsession with a percieved deception is ridiculous, especially when the report you decided I used as a source (I didn’t, I used a secondary source which was itself sourced from that report) was an excellent fact base report that factually supported every claim made. But that’s the thing, every source we every use or discuss is never accepted on merits, and is always accepted or denied based on perceived ideological slant. You did it with the Cornell report, but all you did was point to the word “Labor” as a valid reason for dismissal, I showed you on Wallison and AEP exactly WHY it was a lie.

@CaptinSarcastic @Ragspierre Based on what I recall of my first mortgage and the teeth pulling and influence peddling that went on through the law firm my wife worked for who had special relationships with the lender (oh yes, it was a lot TV, including me marrying the hot secretary) and we still barely got the loan. So if the ONLY category they used to measure sub-prime was that the borrower had a crappy credit score that seems like a very good start.

And I’m a little confused by your last paragraph – a great many people below 660 were able to get prime loans because they did have the several other…etc?

That can’t be what you meant as it argues in the reverse of your contention.

@looker @Ragspierre You are correct Looker, It should have been, “a great manay people with credit scores below 660 were able to get prime loans because they did NOT have the several other defining characteristics of sub-prime borrowers.” When a risk assessment is done properly, a person with an 800 credit scored can be denied a loan or a person with a 600 credit score can be approved. The proof of this is the actual performance of the GSE properly originated loans to people with scores below 660, they had 1/4 of the deliquency rate of actual sub-prime loans. You see the GSE’s did make loans to people with less than 660, but may have required higher LTV, and they did make 90/10 LTV loans, but may have required higher higher income to expenses ratios and/or higher credit scores. Calling 50% of all GSE loans subprime because of ANY single characteristic is deceitful, and the proof of that deceit is the actual perfomance of the loans.